SIME DARBY,Sime proposes special dividend

27 August 2008
HOLD
RM6.45
Target Price: Under review

YE to June FY07 FY08 FY09F FY10F
EPS (sen) 44.2 59.6 66.4 69.2
PE (x) 14.6 10.8 9.7 9.3

Sime Darby Bhd (Sime) posted a net profit of RM3,512mil for the financial year ended 30 June 2008, in line with our forecast of RM3,615mil and consensus estimate of RM3,581mil.

Earnings grew 47% driven by a 139% surge in Plantation profits to RM3,874mil. Sime achieved an average CPO price of RM2,885/tonne (YoY: +65%) and a 14% increase in CPO production to 2.41 million tonnes as FFB yield improved from 19.4 tonnes/ha to 21.7 tonnes/ha. Synergy benefits recorded was RM240mil versus earlier target of RM140mil. The Plantation division provided 71% of group profits, up from 52.5% in FY07 (see Table 2, page 2).

The Motors division recorded a sharp recovery with profits up from RM63mil in FY07 to RM203mil in FY08 while contributions from the Industrial unit grew 7% YoY to RM687mil. Its property division was the only dark spot with contributions slipping 19% to RM407mil on lower unit sales.

A final dividend of 44 sen/share (inclusive special dividend of 10 sen) is proposed. This brings the total for FY08 to 49 sen for a payout of 82%. Management indicated that sustainability of future dividend payout will depend on how earnings will be impacted by the falling CPO prices.

With the robust Plantation profits, Sime ended FY08 with a net cash of RM1.2bil (FY07: RM440mil net debt). Capex for FY09F-10F is trimmed to RM1.8bil-2bil as Sime will not be taking up equity interest in Sarawak Hidro Sdn Bhd. Capex will largely be used to expand its plantation landbank. Sime will soon announce the acquisition of 150,000ha of greenfield land in Malaysia while another 150,000ha has been identified for potential purchase.

Pending a meeting with Sime management, we are keeping our forecast net profit of RM3,988mil for FY09F. Key assumptions include average CPO price of RM3,000/ tonne for FY09F and RM2,800 for FY10F. Management has indicated that every RM100 drop in CPO price would trim Sime’s bottomline by about RM200mil.

No change in our HOLD recommendation as we see share price performance being capped by current weakness in CPO price. We will be reviewing our RM8.60/share target price with a downward bias.